Amid worsening global economic slowdown, compounded by the euro zone crisis, Indian retail market is facing a severe withdrawal syndrome. Not surprisingly, retailers have curbed their urge to expand and are consolidating their business, instead.
The organised retail sector has learnt a few hard lessons from the roller-coaster ride over the past four to five years. The right strategy in handling real estate for many developers has been to optimise sales and make profits. Five years ago, organised retail was in a hurry to expand and grab any real estate available, at any given price. Not any longer. Following the financial downturn, players are now a cautious lot.
“There has been a slowdown in retail consumption. The impact was made worse by increased input prices. Growth in revenues has been marginal or even on the negative side for most retailers and categories,” says Shubhranshu Pani, managing director – retail services, Jones Lang Lasalle India.
Pani is, however, quick to add that retail continues to be a sector with bright prospects, as vast areas continue to be under-retailed in the country. “But, there is insufficient supply of quality real estate spaces, and prices of real estate continue to be high, resulting in pain for retailers.”
Of course, there are several indices the organised players look for before deciding on a location. New models such as ‘revenue sharing supported with minimum guaranteed rent’ too, have emerged in developer-retailer partnerships. However, good real estate still attracts buyers, and claims premium, say retail industry players.
“In 2008, real estate prices were high. In 2009, they came down a bit, followed by a slowdown. The prices started creeping up once again, and now they are reasonably high,” Kumar Rajagopalan, CEO, Retailers’ Association of India, said.
Over these five years, a large number of malls were added in different cities. While there is high demand for malls in good locations, those sharing the same catchment area are going through a slump. Rentals differ from property to property and retailer to retailer. But the real estate price, when compared with yield from it, is much higher in India.
On the other hand, retailers have become careful about choice of property and prices. “We study the spending pattern of a locality – the number of young working professionals, compared with older and traditional population. The number of cars in a locality, credit card spending and sales done by existing retailers are studied before negotiating on rentals with the developers,” said Vasant Kumar, executive director of Max, part of the Landmark group.
In a locality with low spending catchment area, retailers prefer rentals based on a revenue sharing model. If they are sure about the spending potential, they may look at leasing or renting.
“While most retailers locked in high rentals are seen bleeding with losses, we try to keep rentals not more than eight per cent of the sales. Deals are happening now, but are more sensible than what was happening five years ago,” he said. Depending on the category, retailers try to keep real estate costs between seven per cent and 14 per cent of turnover.
According to a recent report by international property advisory, Cushman & Wakefield, the retail real estate market recorded a deferment of more than 30 per cent of retail mall space, against the projected supply for the first half of the year, with fresh mall supply for the first half of 2012 standing at 2.27 million sq ft. About one million sq ft of expected mall supply was deferred to second half of the year or next year. The overall vacancy rate for major cities as at end of the first half of 2012 stood at 19.6 per cent, marginally higher than the previous quarter.
The Cushman & Wakefield report further said that NCR saw the highest mall supply deferment of over 80 per cent, ensuring the city maintained vacancy level at 28 per cent. It saw only 1.2 lakh sq ft of mall supply in the first quarter of the present calendar year, and no supply in the second quarter of 2012. On the other, Bangalore witnessed the highest mall supply of 1.5 million sq ft in the first half 2012. The retail activity in the city continues to remain strong as new mall supply became operational with 90 per cent occupancy, whilst, overall city level mall vacancy stood at 12.6 per cent, the report added.
In case of Kolkata, Nilesh Biswas, managing director of Calcutta Skyline, a property research, consultancy and brokerage company, said that no new mall, hypermart or high-street shopping zone were completed and thrown open over the past couple months. As a result, there were limited and restrictive activities in the retail space of the city, resulting in some stability in capital values.
“Out of the limited activities in retail area, one of the most significant could be the leading women fashion brand, Kazo, leasing large space in Forum Mall, one of the city’s leading upmarket shopping malls on Elgin Road in downtown Kolkata. Significantly, vacancy rates in malls dipped, albeit marginally. So, when it comes to Kolkata’s retail space, the city has neither witnessed oversupply, nor has there been undersupply,” said Biswas.
A number of new retail properties are underway or in the pipeline in the city. At this moment, the developers may have gone slow on these projects, but expect economic growth to revive by the time these projects finally come up.
On the other, Hyderabad is seeing a balance in supply and demand of malls. Aslam S, senior architect, Aslam Architects, however, feels that the key point would be the distribution of mall space across the city. “One should ensure they are not concentrated in a few pockets, which will be the key to ensure the traffic situation does not go haywire because of concentration of malls.” Also, there are no pressures on the malls in terms of rentals, he said.
D Sreedhar Reddy, managing director of Lanar Realtors, says, at least eight to 10 malls are being planned in Hyderabad, while three are in stages of construction. The going is stable for malls, and the existing ones are doing extremely well. The average rentals are around Rs 50 per sq ft.
RK Arora, chairman and MD of Supertech, which has two projects coming up in Noida, believes that New Delhi still generates demand for retail space. “We are, however, seeing a shift in business model, where the mall developer and the retailers go for a revenue sharing model with a minimum guarantee scheme. This model is a huge success as it gives a guaranteed income for both the sides,” says Arora.
On the other, Chennai has been witnessing a good demand – supply equation, thereby, leading to stable rental revenues for mall developers. “Earlier, the demand was in excess of supply. Now, it is not only even, but also spread across all parts of the city, thereby, preventing concentration of malls in any one particular region,” says Sanjay Chugh, founder, Skylines Property Advisory.
While the city has accounted for 2.5–3 million sq ft of mall space so far, another two million sq ft is under construction. However, certain micro-markets like Adyar and Thiruvanmiyur, which boast of good catchment area of consumers, lack supply of quality retail space, he pointed out.
Summing up the scenario, Jones Lang Lasalle India’s Pani says, “Most brands have pulled back and become cautious. Long-term players continue to expand cautiously. There is demand for growth, but retailers prefer to defer or delay their expansion plans.”
According to him, rentals across metros are stable, while properly conceived, located and professionally managed malls have increased prices. Going forward, he feels, “The second half of 2012 has very few mall openings planned, and there is a possibility of some of them slipping into first quarter of 2013.”
This may, as most industry watchers would love to believe, push up sales, and change sentiments from cautious to positive.
(With inputs from Sangeetha G, Ritwik Mukherjee, Sanu Sandilya and B Krishna Mohan)
govardand@mydigitalfc.com
Source:wrd.mydigitalfc.com
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